January 13, 2012
How to Handle Medical Loss Ratio Rebates: Guidance for Insured Plans Subject to ERISA
Update: On April 2, 2012, the IRS updated answers on its website to frequently asked questions (FAQs) that provide information on the federal tax consequences to employees when a Medical Loss Ratio (MLR) rebate stems from a group health insurance policy.
One of the insurance market reforms enacted by the Affordable Care Act1 was a Medical Loss Ratio (MLR) standard that requires insurance companies to spend a certain proportion of income on health care for their insured population. If an insurer does not meet the MLR standards, it is required to issue a rebate to its policyholders. The MLR standards do not apply to self-insured plans. In late 2011, the Department of Labor (DOL) issued Technical Release 2011-04, which provides guidance on how sponsors of group health plans covered by the Employee Retirement Income Security Act of 1974 (ERISA) should handle such rebates.2 This Capital Checkup provides an overview of the MLR rules, and a discussion of how plan sponsors should handle potential MLR rebates.
The Affordable Care Act requires insurance companies in the large-group market (generally, those with at least 100 employees) to spend at least 85 percent of premium dollars on medical care and quality-improvement activities. Insurers in the small-group and individual markets must spend at least 80 percent of premium dollars on such care. The National Association of Insurance Commissioners (NAIC) developed guidelines for how to measure MLR, which were adopted by HHS in Interim Final Regulations issued in 2010 by the Department of Health and Human Services (HHS) and amended in 2011.3 Separate methodologies were established for “mini-med”4 and expatriate policies.5 The Interim Final Regulations required that broker commissions must be treated as administrative costs when calculating MLRs, and this position was unchanged in the amended regulations.
Beginning in June 2012, insurers will be required to report 2011 data concerning MLR to each state in which they do business. In August 2012, insurers that did not meet the MLR standards for their 2011 policies will be required to provide a rebate to their enrollees.
When reporting data, the insurer will report aggregate premium, claims experience, quality-improvement expenditures and non-claims costs it incurs in connection with the policies issued in the large-group, small-group and individual markets in each state. Experience will not be broken down among products offered in the state, nor will it be reported for each individual policy. The experience for group coverage of employees in multiple states will be attributed to the state that regulates the insurance contract between the insurer and the group health plan.
Consequently, insurers will be calculating MLR based on their entire business in the large-group or small-group market, not based on a particular group health plan’s experience. Moreover, whether an MLR rebate is due to a particular plan sponsor will not be affected by the experience of its individual group or a particular participant’s claims.
Rebates to Enrollees in the Group Market
The Affordable Care Act requires an insurer that does not meet the MLR standards to provide an annual rebate to each enrollee under such coverage, on a pro rata basis. The rebate could be in the form of a premium credit, lump-sum check or lump-sum reimbursement to the same account that the enrollee used to pay the premium. However, in order to assure that the rebate does not represent taxable income to participants in a group health plan, HHS directed insurers in the group market to provide rebates to the group policyholder and to include protections designed to satisfy the objective of benefitting participants.
When rebates are paid to a group policyholder that is an ERISA plan sponsor, the rebates may be plan assets, and thus subject to rules under Title I of ERISA relating to fiduciary responsibilities and prohibited transactions.6 The Department of Labor has historically issued rulings governing similar distributions, for example, Information Letters issued to address proceeds paid to employers from insurance company demutualizations. Consequently, the Department of Labor published guidance regarding the duties of employers, plan sponsors, and other fiduciaries responsible for decisions related to MLR rebates.
DOL Guidance for ERISA Plan Fiduciaries
Plan sponsors must review ERISA’s plan asset, fiduciary responsibility and prohibited transaction rules in determining how to handle a rebate. Technical Release 2011-04 answers the following key questions:
- Is the rebate a plan asset? DOL Technical Release 2011-04 states that to the extent that an MLR premium rebate is considered a plan asset, it is subject to the requirements of Title I of ERISA. When considering whether the rebate is a plan asset, the key question is, “Who is the policyholder?” If the plan or its trust is the policyholder, then the policy and the rebate are plan assets. As a result, MLR rebates will generally be plan assets of a multiemployer plan.
- What are the plan sponsor’s fiduciary responsibilities? When a rebate is a plan asset, fiduciaries must act prudently, solely in the interest of the plan participants and beneficiaries, and in accordance with the terms of the plan document when handling the asset. The DOL also adds that fiduciaries must act impartially when allocating the asset, and cannot benefit the fiduciary at the expense of other participants.
If distributing payments to any participants is not cost-effective (for example, because the amounts would be de minimis or would give rise to tax consequences to participants or the plan (as would be the case for cash payments to participants), the fiduciary may apply the rebate toward future participant premium payments or toward benefit enhancements. Where the cost of distributing shares to former participants approximates the amount of the rebates, the fiduciary may allocate the proceeds to current participants based upon a fair and objective allocation method.
Notice of Rebates
Insurers must provide notice of rebates, if any, to current group health plan participants, as well as group policyholders. The notice must include general information about the MLR, the issuer’s MLR, and the rebate, as well as other prescribed information that will vary depending on whether the plan is subject to ERISA or to HHS rules.
An additional new notice for insurers that do not owe a rebate has not been required, but HHS indicates it intends to amend the rule in the future to provide such a requirement.
Implications for Plan Sponsors
Plan sponsors with insured group health policies should review plan documents now to determine whether they address payment of rebates. Because many plan sponsors received insurance company distributions during the demutualization process in the 1990s and the following decade, some plan documents may have been amended to incorporate these policies. That language should be reviewed to assess its relevance today.
Insurance companies will report data in June 2012, and pay rebates in August 2012. Plan sponsors with insured arrangements should be alert for communications from their insurance carriers during the summer of 2012, and should be prepared to address rebate distribution.
While plan sponsors should be prepared to address rebates, it may be unlikely that rebates would have wide applicability in the large-group market. Studies published by the Government Accountability Office (GAO) found that, based on insurance company data reported to the NAIC in 2010, most insurers in the large-group market met or exceeded the 85 percent standard.7 However, it is wise to be aware of the HHS rules in case the MLR standard is not met in the future.
In light of the fact that the amended regulations did not change the requirement that broker commissions will be included in the administrative expense portion of the calculations (noted in the “Background” section above), some insurers have already begun to change their commission policies to remove or reduce brokers’ commission levels from premiums. Plan sponsors may want to ask brokers that currently receive commission to disclose any changes in how those commissions will be reported and charged to the plan in the future.
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As with all issues involving the interpretation or application of laws and regulations, sponsors of group health plans should rely on their legal counsel for authoritative advice on the interpretation and application of the Affordable Care Act and related regulations. Segal can be retained to work with plan sponsors and their attorneys on compliance issues and participant communications.
- The Affordable Care Act is the shorthand name for the Patient Protection and Affordable Care Act (PPACA), Public Law No. 111-48, as modified by the subsequently enacted Health Care and Education Reconciliation Act (HCERA), Public Law No. 111-152. (Return to the Capital Checkup.)
- Technical Release 2011-04, which was published on December 2, 2011, is available on the DOL’s website. (Return to the Capital Checkup.)
- The NAIC guidelines are available on the NAIC website. The 2010 HHS regulations were published in the December 1, 2010 issue of the Federal Register and the 2011 amendments were published in the December 7, 2011 issue of the Federal Register. (Return to the Capital Checkup.)
- “Mini-med” refers to policies that have annual benefit limits of $250,000 or less. (Return to the Capital Checkup.)
- The guidance for mini-med and expatriate policies was published in the December 7, 2011 issue of the Federal Register. (Return to the Capital Checkup.)
- Title 1 of ERISA concerns the protection of participants in private sector employee benefit plans. (Return to the Capital Checkup.)
- See the following GAO reports: Early Indicators Show That Most Insurers Would Have Met or Exceeded New Medical Loss Ratio Standards (GAO-12-90R, Oct 31, 2011) and Early Experiences Implementing New Medical Loss Ratio Requirements (GAO-11-711, Aug 29, 2011). (Return to the Capital Checkup.)
Capital Checkup is The Segal Company's periodic electronic newsletter summarizing activity in Washington with respect to health care and related subjects. Capital Checkup is for informational purposes only and should not be construed as legal advice. It is not intended to provide guidance on current laws or pending legislation. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.